Mutual Funds 101

A mutual fund is a financial product that bundles many individual stocks, bonds, or a combination of both into one security. Investors use mutual funds to take advantage of a money manager’s expertise on what stocks, bonds, or a combination of both to invest in. There are literally thousands of mutual funds in a variety of different risk tolerances to meet investor’s needs. Mutual Funds generally have multiple shares classes, where the underlying management of the fund and its holdings are identical, but the internal operating expenses for investors are different. Follow along for a brief explanation of the share classes that we offer.

A - Share Mutual Funds -

  • Up Front Commissions - 0% - 5.75% depending on type of mutual fund and amount of investment
    • Up front commissions are split between the advisors firm and the mutual fund company
  • Operating Expense Percentage – An annual percentage charged by the mutual fund company to manage the mutual fund. This percentage is reflected in the price per share on a daily basis.
    • Operating expenses are split between advisors firm and mutual fund company
  • The average stock mutual fund has an expense percentage of 1.0 – 1.3%
*Larger investments in one mutual fund family typically qualify for up front commission discounts.

C - Share Mutual Funds -

  • Up Front Commission = 0%
  • Annual Fee / Expense Ratio = Avg. 1.75%
    • Split between advisor, firm and mutual company
    • Typically the advisor and firm split 1.0% of the 1.8% annual fee / expense ratio  
*Usually possess a deferred sales charge of 1% if sold within 1 year of purchase

Expense Comparison

A share expense   C share expense
Year 1 = 5.75% + 1% = 6.75% 0% + 1.75% = 1.75%
Year 2 = 6.75% + 1% = 7.75% 1.75% + 1.75% = 3.5%
Year 3 = 7.75% + 1% = 8.75% 3.5% + 1.75% = 5.25%
Year 4 = 8.75% + 1% = 9.75% 5.25% + 1.75% = 7%
Year 5 = 9.75% + 1% = 10.75% 7% + 1.75% = 8.75%
Year 6 = 10.75% + 1% = 11.75% 8.75% + 1.75% = 10.50%
Year 7 = 11.75% + 1% = 12.75% 10.50% + 1.75% = 12.25%
Year 8 = 12.75% + 1% = 13.75% 12.25% + 1.75% = 14%


* This chart is for illustrative purposes only, and the actual investment may have a different expense schedule.


Load Waived Mutual Funds and Exchange Traded Funds (ETF’s)

Mutual Funds are generally actively traded securities with the idea to beat a specific benchmark or average. The Mutual Fund manager’s job is to seek positions in stocks; bonds or both that are believed to be better performers. As discussed in Mutual Funds 101, Financial Advisors typically recommend A share and C share Mutual Funds. These Mutual Funds are typically offered in what is also called a load waived or institutional share class, which do not include an upfront, residual or back end commissions. Financial advisors use load waived and institutional share class mutual funds inside of fee based accounts, which is covered in the Financial Advisor Compensation – Fee Based education piece.
ETF’s on the other hand are passive securities with the idea of replicating a particular index and keeping the costs especially low. Like Mutual Funds there is literally thousands of choices to fit an investor’s particular needs. ETF’s are recommended by Financial Advisors both on a commission bases and inside of fee based accounts.
Active and passive investing has been debated as long as these products have been around; at the end of the day both have been successful in helping investors achieve their goals. Regardless of your preference of active or passive investing, building a portfolio of these products inside of a fee based account aligns the Financial Advisor and investor’s interests by being able to recommend rebalancing or trading without being paid a directly correlated commission.